Models behaving badly

By Emanuel Derman

June 25, 2011

Hello, I must be going
For a good many years I have been blogging at http://www.wilmott.com/blogs/eman/, a quantitative finance website run by Paul Wilmott, with whom I wrote The Financial Modelers’ Manifesto, a sort of ethical guide for financial modelers triggered by the Great Financial Crisis and inspired by the Communist Manifesto and the Hippocratic oath. Then recently Jim Ledbetter and Felix Salmon invited me to blog on Reuters, i.e. here, where I will be continuing, and so, here is my first Reuters blog.

I also write on Twitter @emanuelderman

A bit about myself and my interests:

Myself
I grew up in South Africa, came to the US to study physics, got a PhD from Columbia in 1973, worked in academia doing theoretical physics for seven years, worked at Bell Labs for five, worked at Goldman Sachs for about 17, where I ran several quant groups and was eventually head of quantitative risk management. I left Goldman in 2002 and have been a professor at Columbia University since then, where I run the financial engineering program, and am also a principal at Prisma Capital Partners, where I co-head risk management.

Needless to say, but important to stress, this blog and anything in it is entirely mine, and has nothing to do with Columbia or Prisma.

Being labeled a quant used to be a pejorative in the geeky sense, but now it’s become trendier, but also occasionally pejorative in a harsher way. Ben Zimmer in the NY Times wrote an article about quants here and the NY Times Science section had an article here. But quant means something different now from what it used to, and many people who now call themselves quants wouldn’t have qualified as quants in the old days, something I will write about later.

It’s about metaphors and analogies, about the nature of modeling and theorizing, the difference between them, why financial models will intrinsically and always at best be very limited approximations to reality, and what to do as a consequence.

What I’m interested in
Though I started blogging as a quantitative financier, I found myself writing about many other things, which I intend to do here too. If you want to get an idea, you can look at my old blog site at www.wilmott.com/blogs/eman.

I’m interested in

Models, and in particular models behaving badly. The first chapter of my forthcoming book is called A Foolish Consistency and is about models behaving badly in personal and political life — I grew up under apartheid.

Finance and financial theory, and what it can tell you about the wider world, since many financial models deal with volatility, omnipresent in human life. I was going to call my current book Time Decay rather than Models.Behaving.Badly, and wrote a novella to illustrate the idea of Time Decay in human life, but that will have to wait for another attempt.

Ethics, particularly in the financial world.

Philosophy, but only as a guide to living.

Literature. One of my favorite authors is Nabokov; another is Flaubert.

If you’re taking suggestions, what I’d really like to know is how to dismantle the world of finance. It just doesn’t seem to be very useful for many people. Do you think it carries within itself the germ of its own destruction, and we needn’t think about it too much?

Nope, you’re not being dim. It takes a while to get set up with an RSS, I’m told. Soon, I hope.

I don’t think the world of finance can be dismantled. Capitalism has a wild anarchic energy that is both creative and destructive, seeking outlets anywhere. And when it gets destructive, it takes many things down with it. One has to somehow tame it but not eviscerate it.

@RichardWatson & EmanuelDerman – if you simply plug the URL of the blog, http://blogs.reuters.com/emanuelderman, into the “add subscription” box on Google Reader, the blog (in full feed glory) will be picked up!

[...] lead to disaster on Wall Street and in life. You can read a bit about Derman (in his own words) here and here; his occasional blog is here. He is currently a professor at Columbia University, [...]

Author Profile

Emanuel Derman is Head of Risk at Prisma Capital Partners and a professor at Columbia University, where he directs their program in financial engineering. He is the author of My Life As A Quant, one of Business Week's top ten books of the year, in which he introduced the quant world to a wide audience. His latest book, due in October from Free Press, is Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disasters,On Wall Street and in Life.